Management Discussion and Analysis
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MANAGEMENT DISCUSSION AND ANALYSIS BUSINESS REVIEW Production, Distribution and Licensing of Content Prudent investment and stringent cost control measures were implemented on production and the Company maintained an operating profit of approximately HK$126,000 in the year ended 31st March, 2004 (2003: HK$2 million). The Company maintained a balanced portfolio of self-produced and co-produced films and commissioned projects with an objective to enriching its quality content library. Through various production labels, the Group produced and licensed premium Chinese entertainment content for movies, television programs and documentaries. The Group’s associated company, Applause Pictures, continued to engage in syndicate financing and initiated co-production projects during the year. “The Eye”, which achieved unprecedented success Asia-wide last year, was released in European and North American countries this year. The successful expansion of its regional and global distribution not only outperformed other competitors in the local market, but also strengthened the leading position of Applause Pictures in the pan-Asian film market. “Golden Chicken 2”, starring Miss Sandra Ng, was released in Hong Kong during the Christmas of 2003 and grossed box-office receipts of approximately HK$10 million. “The Eye 2”, starring Miss Shu Qi, also grossed satisfactory box-office receipts during its debut in Asia in late March 2004. Anytime Pictures is a new premium movie production venture wholly owned by the Company and aims to produce high quality movies targeting Hong Kong and the PRC market. Led by one of the Company’s directors, eminent movie enthusiast Mr. Tsang Chi Wai, Eric, Anytime Pictures focuses on nurturing up-and-coming filmmaking talents and the development of movies with bold concepts and new elements. “Men Suddenly In Black”, directed by Mr. Pang Ho Cheung, was released in September 2003. It achieved satisfactory box office results and attracted significant market attention. The movie was one of the “Best Ten Chinese Films” at the 9th Golden Bauhinia Awards, and Mr. Tony Leung Ka Fai and Mr. Pang Ho Cheung were awarded the “Best Supporting Actor” and “Best New Director” for their respective roles at the 23rd Hong Kong Film Awards. Another movie and TV program production label of the Group, Bob, became an associated company of the Group during the year. The Group’s highly acclaimed documentary label, Discover China has been focusing on the production of quality documentaries featuring Chinese customs and traditions. The Group was appointed by Discovery Networks Asia as the supervising producer of the project “First-time Filmmakers – 2002” in China and produced a series of six half-hour documentaries. The series were aired on Discovery Networks Asia in June 2003 with impressive rating performance. The excellence in such documentary production won critical acclaim and international recognition, with “The Weight of Paper” being the winner of “The Best Documentary” while “Beating Tradition” and “Forever Beijing” were Runner-ups in The Asian TV Awards. The series were also finalists in the New York Festivals 2004. Documentary “Myths and logic of Shaolin Movie ”Men Suddenly in Black” Movie ”The Eye 2” Movie ”Golden Chicken 2” Kung Fu” Movie “Jiang Hu” 4 SMI CORPORATION LIMITED annual report 2004 MANAGEMENT DISCUSSION AND ANALYSIS Leisure Business Leisure business contributed an operating loss of approximately HK$17 million (2003: HK$10 million), which comprised an operating loss of approximately HK$18 million (2003: HK$12 million) from theme restaurant operations and an operating gain of approximately HK$1 million (2003: HK$2 million) from theme restaurant franchising. During the year, leisure business was hit by the Planet Hollywood, Tokyo adverse impact of SARS and operational performance had lagged behind management’s Star East, Shanghai expectations. Positive contribution from continued cost rationalization in theme restaurant operations was nullified by the negative impact of SARS. In line with the Group’s strategy of concentrating on businesses with growth prospects, the Group made no further investments or expansions in theme restaurant operations and divested its interests in Planet Hollywood Asia in December 2003. Theme restaurant operation of the Group now comprises mainly Star East, Shanghai and Planet Hollywood, Japan. Other Businesses Talent Management and Music Production Talent management and music production recorded an operating loss of approximately HK$9 million (2003: HK$14 million). Amidst the gloomy environment of the local music industry, the Company only released 3 new music albums during the year. Nevertheless, the Group and its artistes won a number of awards including “The Most Popular Group Song” (bronze prize) and “Outstanding Performance of the Year” (bronze prize) at TVB’ s “ JSG Annual Awards Presentation 2003”, “Karaoke Song Award” and “The Most Popular Dance Song” at Metro Radio’s “Hit Radio Billboard Awards Presentation 2003”; and “The Best New Female Artiste” (silver prize) at TVB8 Channel 2003. In view of the continued losses Artistes managed by Star East recorded in the music production SMI CORPORATION LIMITED annual report 2004 5 MANAGEMENT DISCUSSION AND ANALYSIS division and the increasingly competitive operating environment, the management decided to scale down the operations of music production towards the end of the year. As at 31st March, 2004, the Group managed over 20 artistes. The negative impact of SARS during the year had resulted in cancellation or postponement of artistes’ jobs, which adversely affected the performance CD albums published by Star East of the talent management division. However, operational restructuring was implemented by the end of the financial year to increase cost efficiencies of the division. Artistes managed by Star East Wireless Value-Added Services China possesses the largest mobile subscriber base in the world which has spurred growing demand for wireless value-added services in recent years. Building on the Group’s strengths in content production, the Group has embarked on the provision of exclusive entertainment content to wireless value-added service providers and invested in entities offering fee- based entertainment-oriented wireless value-added services, including short messaging services (SMS), multimedia messaging services (MMS), wireless application protocol services (WAP), color ringback tone (CRBT) and interactive voice response services (IVRS), to nationwide mobile phone users in China. Recognizing the huge market potential, the Group has been exploring further investment opportunities in the wireless value-added service market in China. Strategic Investment in M Channel Corporation Limited The Group has been holding an effective interest of approximately 26.91% in M Channel. M Channel was principally engaged in the out-of-home audio and video media business through a platform of approximately 1,000 public light buses and approximately 160 fixed locations (including those within Watson’s the Chemist and fast food chain stores) in Hong Kong and approximately 600 public buses in Guangzhou. M Channel 6 SMI CORPORATION LIMITED annual report 2004 MANAGEMENT DISCUSSION AND ANALYSIS FUND RAISING During the year, the Group raised new equity funding of approximately HK$135 million pursuant to (i) a placing of 300 million new shares at a price of HK$0.04 per share to independent third parties, which was completed on 12th June, 2003; (ii) a subscription of 500 million new shares by ITC Corporation Limited (“ITC”) at a price of HK$0.04 per share, which was completed on 9th July, 2003; and (iii) subscriptions of 1,100 million and 1,575 million new shares by Strategic Media International Limited (“SMI”) at a price of HK$0.04 per share, which were completed on 9th July, 2003 and 19th December, 2003 respectively. Of the HK$135 million equity funding raised as aforesaid, approximately HK$20 million was applied by the Group to partially repay a shareholder’s loan, HK$84 million was used for general working capital, and the remaining HK$31 million was invested in media and entertainment related businesses. MATERIAL ACQUISITION AND DISPOSAL On 6th November, 2003, the Company entered into a conditional sale and purchase agreement with SMI (“Realmax S&P Agreement”) for the acquisition of the entire issued share capital of Realmax Holdings Limited (“Realmax”) (which holds an indirect 20% equity interest in a Sino-foreign joint venture engaged in the research, development and production of computer software, prop scene, costumes and lighting equipment, provision of consultancy and technical support service for the aforesaid products, and leasing and sale of such products) and the shareholder’s loan extended by SMI to Realmax at an aggregate consideration of HK$20 million. Due to the longer than expected progress to completion and the availability of other favourable investment opportunities for the Group, through mutual agreement the Realmax S&P Agreement was subsequently terminated by the parties on 16th February, 2004. In February 2004, the Group entered into sale and purchase agreements to acquire a 50% interest in Chengdu Stellar Digital Information Company Limited (“Stellar Digital”) and a 25% interest in Stellar Cinema Investment Company Limited (now renamed Stellar Cinema Development Limited) (“Stellar Cinema”). Both companies were incorporated in the PRC with limited liability. Stellar Digital is engaged in the operations of cyber cafés and the provisions